There's Reason For Concern Over Lanzhou Zhuangyuan Pasture Co., Ltd.'s (SZSE:002910) Massive 36% Price Jump

Lanzhou Zhuangyuan Pasture Co., Ltd. (SZSE:002910) shares have had a really impressive month, gaining 36% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 25%.

Even after such a large jump in price, it's still not a stretch to say that Lanzhou Zhuangyuan Pasture's price-to-sales (or "P/S") ratio of 2.1x right now seems quite "middle-of-the-road" compared to the Food industry in China, where the median P/S ratio is around 1.8x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Check out our latest analysis for Lanzhou Zhuangyuan Pasture

What Does Lanzhou Zhuangyuan Pasture's P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at Lanzhou Zhuangyuan Pasture over the last year, which is not ideal at all. Perhaps investors believe the recent revenue performance is enough to keep in line with the industry, which is keeping the P/S from dropping off. If not, then existing shareholders may be a little nervous about the viability of the share price.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Lanzhou Zhuangyuan Pasture's earnings, revenue and cash flow.

Is There Some Revenue Growth Forecasted For Lanzhou Zhuangyuan Pasture?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Lanzhou Zhuangyuan Pasture's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 9.9% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 6.2% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 14% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we find it concerning that Lanzhou Zhuangyuan Pasture is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh on the share price eventually.

What Does Lanzhou Zhuangyuan Pasture's P/S Mean For Investors?

Lanzhou Zhuangyuan Pasture's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Our look at Lanzhou Zhuangyuan Pasture revealed its shrinking revenues over the medium-term haven't impacted the P/S as much as we anticipated, given the industry is set to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Lanzhou Zhuangyuan Pasture (2 can't be ignored!) that you need to be mindful of.

If you're unsure about the strength of Lanzhou Zhuangyuan Pasture's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.